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Tax department

Tax aspects of company transformation

Properly planned transformation of enterprises can bring notable profits. Such transformation may entail reduction of unnecessary costs of running business activity, as well as it allows limiting the liability of members for obligations of the enterprise. It can also facilitate the implementation of a specific tax strategy.

To properly prepare the structure of the enterprise, it is necessary to know all aspects of its activities and characteristics of the market. A matter of great importance are also business plans of the taxpayer.

As a rule, the transformation of enterprises are tax law irrelevant operations. There are a few exceptions that are worth keeping in mind, because they may have a decisive influence on the economic legitimacy of the transformation.

Partnerships

Each partnership can be converted into another partnership or a company (eg. limited liability company or joint stock company). This also applies to transformation into a limited liability partnership, which is a separate taxpayer of corporate income tax (CIT).

Changing the legal form of a partnership into another partnership does not cause negative tax consequences. Partners still are taxpayers of personal income tax, and the partnership continues to be taxpayer of VAT. Furthermore, there is no need to close the company books.

It is different when one converts partnership into company, because there is the problem of double taxation. Firstly, corporate income tax on company income, secondly the personal income tax on dividend received by shareholders.

The capital companies

The transformation of a capital company into a partnership is much more complicated. First of all, the company must close its books and file an annual corporate income tax return.

On the day of transformation, the company begins a new tax year and opens its books. A company ceases to be subject of income taxes, but their partners are. The result is that it is not possible to take into account loss which company incurred before transformation.

On the day of transformation, any undivided profit of a company are transferred to the shareholders of a partnership. Such profit is deemed to be share in the profits of a legal person, which is taxed at the rate of 19%.
It is worth mentioning that the transformation of a limited liability company into a limited partnership may also have an effect under the civil law transactions tax. Although this is a questionable issue, the majority of notaries collect this tax.

There are no changes on VAT. A partnership is a taxpayer of it in the same way as all other companies. So this is an application of a “full continuation principle”.

CGO Legal Law Firm is specializes in preparing both the transformation plan and the organizational and legal structure of the new enterprise. We also assist in the implementation of such a structure, providing full support and advice. If you want learn more about tax aspects of company transformation feel free to contact us.